Good News, Bad News

April 1, 2009
The U.S. Industrial Production Index is indicating significant trouble ahead for the U.S. economy.

Production is declining below year-ago levels and the rate of decline is accelerating. We have not changed our forecast in that this recession is projected to last into 2010. We have been on this point for years now and nothing has happened to move us off of it.

The U.S. Industrial Production 12/12 low will likely occur around March 2010. For those not all that familiar with our terminology, that means the Industrial Production Index will be shifting out of recession mode into a recovery posture at that time. The actual recovery won’t be generally recognized for one to two quarters after the first quarter. We also think the recovery in the latter half of 2010 will be very mild. It would be unwise to plan on a robust recovery given the likelihood of increased inflationary pressures, tax increases and our projection of increased energy costs.

A lot of folks wonder if the United States is poised to experience a lost decade, similar to what plagued Japan in the 1990s. We don’t subscribe to that school of thought. The social dynamics are different, the demographics are different and the world is much flatter than it was 20 years ago. My opinion is that American capitalism still works and that business will find a way to go back to work, hire people and buy products. In short, the economic system will “naturally” begin to heal itself of the excesses and imbalances of the last few years.

“Excesses and imbalances” sounds much better than the plain reality, which is we have been on a credit binge for the last few years and now we have to deal with the hangover. It may seem like the headache will never go away, but it always does.

The U.S. housing market is not looking promising for any near-term recovery. We expect the decline to slow in the near future, but it may very well be mid-2010 before the data trends improve. Expect the recovery in 2010 to be painfully slow and modest. Anytime in the next 12 months would make an excellent opportunity to buy some real estate for personal or investment purposes.

Signs of life

There is good news stirring. We look at many key economic leading indicators and are happy to report that two of them are showing signs of life. The tentative lows in the Corporate Bond Prices 12/12 and the Purchasing Managers Index 1/12 both put us on track for a March 2010 low in the U.S. Industrial Production 12/12. We therefore have tentative signs of the coming recovery, even before Congress can get the Stabilization and Recovery Act money out the door.  Good news—the system appears to work!

A good measure of business-to-business activity is found in “Nondefense Capital Goods New Orders without Aircraft.” New Orders are heading lower in the early months of what is sure to be a prolonged declining trend, as evidenced by the rates-of-change and the negative macroeconomic climate. Thus, more recession in 2009.

The “Metalworking Machinery Production Index” is expected to move lower until about June 2010 before being essentially flat in the last half of the year. There are no internal or external signs of a near-term business cycle low. We suggest that industry participants budget for two tough years as the global economy unwinds.

Seasonal weakness and plunging rates-of-change are highly indicative of further deterioration in “Electrical Equipment New Orders” in 2009.  Annual New Orders continue to plunge at an alarming rate. The troubles in this industry segment will not get better until 2010.

Alan Beaulieu, [email protected], is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments. Visit and subscribe to monthly updates on EcoTrends.

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